Like many other investors, I too sometimes worry about the prospects of 2011. Well 2010 was reasonable for many emerging markets with double digit returns. Even matured markets fared relatively better.
How will 2011 perform? Will it dip impacting my portfolio? Should I hedge? What are the derivative strategies to follow? The dark clouds at the horizon are many i.e.
1. Oil prices above USD 120 p/b.
2. Inflation is a threat in many economies, partly thanks to high oil prices
3. Interest rates go up, partly due to inflation
4. Lesser credit off take, thanks to higher interest rates
5. All of the above can lead to lower economic activity
6. Many people criticize massive US deficits and China surpluses
A calmness of a Zen monk descended on me when I read Financial Times (FT) on 12Apr2011. In the page 3, it carried an article titled "IMF sees steady economic recovery'. IMF in its recent report stated that world GDP will grow by 4.4% in 2011 and 4.5% in 2012 and optimism was expressed on advanced economies. IMF did not ignore the sovereign debt problems of Europe or the Middle East unrest. Despite such instances, they said that it was now more certain about its forecast than in Oct2010. They said that double dip threat is receded with more sustainable global economic activity. Of course, at last good news!. Respectable FT carries a news article that says things are looking better despite all troubles. I felt calm and happy.
But it did not last long. The page 11 of FT of the same date (12Apr2011) had another article title "Tighten seatbelts; 2011 could be worse than 2010". It said that the macro economic risks are now higher because of Arab Spring (Middle East political changes), Japan's earthquakes, slippage in US growth estimates, tightening of US fiscal policies, etc. It says that if the oil price increase continues, it will impact the growth. Well some of my worries returned with vengeance.
In New Testament, Roman Governer (of Palestine) Pontius Pilate asks a question to Jesus "What is truth?” The apt religious answer to this question is also given in New Testament. (Those who want to know this truth may read the New Testament or seek the help of a biblical scholar). However the truth I seek now is more of financial in nature. Which of the above two views expressed in a respected financial newspaper is the truth?
Do you think FT is sending out a confused message? FT is not alone. Even the chairmen of reputed supra-national mutual funds are also confused. One of them recently remarked that despite all the issues, emerging economies like India will attract investments and said that India is a growing market of around 8% growth in real terms. This should translate into corporate earnings growth of 14%-18%. Hence there is no way that anyone investing can ignore India.
After a few days, the same person said that high crude prices (which possibly could hit USD 200 p/b), lacklustre industry data, scams, interest rates etc are not good for Indian economic growth.
As I write this today, Indian market sharply shot up on its last trading day by 2.2%. A paradox?
It is clear that FT is confused. Same is the case with MNC Mutual Fund gurus. Among these troubles, Warren Buffet seems unconfused or probabily not worried about the current investment climate. No doubt half a century of experience and skills would help him. Recently he acquired Lubrizol and was in India seeking investing opportunities.
Let us turn to the master investor for some clue how to handle situations like this. He is basically a long term player, although he has his own type of short term bets. His long term focus proved to be a very powerful approach to manage a portfolio, which helped through market ups and downs. His company has seen several crisis – 1973 Oil crisis, 1987 stock market crash, 1991 Gulf war, Dot com crash of early 2000 and recently 2008 Global crisis. The portfolio of investments, comprising listed and unlisted companies, performed satisfactorily, despite all these troubles.
If you are convinced that the stock market would do well over the long term, you can win by limiting the downside of the portfolio during bear markets. This is one of the important guidelines of Warren Buffet (often mentioned in his letters) as his focus seems to be on limiting the downside to his portfolio. For him a performance of (–)10% of the portfolio vs. (-)20 % of an Index (say Dow or FTSE or Nifty or Nikkei) is better than a +20% portfolio performance vs. +10% of an Index.
